Dressed to the Nines with Gold

While paper gold is getting the cold shoulder in the West, the Love Trade
buyers in the East are wrapping their arms around all the physical gold they
can get their hands on.

In the third quarter, gold jewelry demand was at the highest level since 2010.
Buying out of love in the East was significantly higher during the first nine
months of the year compared to demand the same time last year, according to
the World Gold Council (WGC). As the chart
shows, buyers in Hong Kong and China went on a shopping spree for gold jewelry,
as demand rose 40 percent and 35 percent, respectively, on a year-to-date basis
in 2013 compared to the same period last year.

Another way to look at the strong demand coming from the East is to compare
it to Western demand. As you can see below, so far in 2013, the East purchased
5 times more gold bars, coins and jewelry than the West. Together, Chindia
purchased a whopping 1,500 tonnes in physical gold in nine months.

It's important to note that despite the government's efforts to stop
Indians from buying gold, jewelry demand in India was still about 12
percent higher in the first nine months of 2013 compared to same time frame
last year. The buying continued despite the fact that premiums were above
the international price of gold.

Indian gold demand did weaken in the third quarter, as consumers were discouraged
from loading up on the yellow metal through official channels. Residents faced
a depreciation of the rupee, the tight restrictions, and confusing regulation,
as gold bullion imports were tied to a fixed level of exports, says the WGC.

An emphasis should be placed on gold demand recorded by "official channels," as "gold
entering the country unofficially through India's porous borders helped to
meet pent-up demand," according to the WGC.

While traveling in India, I'm anticipating that I'll gain tacit knowledge
on this topic. I'm eager to learn how locals think the government will contain
its current account deficit that has weighed on the economy. It seems the slowdown
in GDP per capita has created a short-term setback for gold, but when the economy
picks up, there should be ready buyers lined up outside the gold shops.

Dressed to the Nines in Gold

What's interesting about gold demand today is that more and more investors
around the world are buying higher-end, more expensive gold. Specifically in
China, 24-karat gold jewelry and 'four nines' gold gained market share in the
third quarter, says the WGC.

'Four nines' is named for the almost pure gold content of 99.99 percent; in
comparison, 24-carat jewelry has a purity of 99.95 percent. According to the
WGC, 'four nines' gold is "unique to China and has proved to be most popular
with consumers in lower tier markets and rural areas, again reflecting the
investment qualities offered by such jewelry," says the WGC.

I point this out because investors should take note of the emerging trend
for luxury goods as a result of growing incomes in emerging markets around
the world.

Take the buying of high-end products such as Chanel and Louis Vuitton bags,
Rolex watches, and Chow Tai Fook jewelry in China, for example. From 2009 to
2012, the luxury-goods sector grew by 41 percent, due primarily to "lavish
spending by rich Chinese and aggressive gift giving," according to research
from CLSA. Looking over the next five years from 2013 though 2018, the middle
class in China will increasingly be participating in this boom, as "income
levels pass critical inflection points for spending on luxury items," says
CLSA.

Jewelry is only one of many luxury items that has been seeing significant
growth year after year. CLSA finds that from 2009 to 2012, jewelry sales increased
115 percent in Hong Kong and 172 percent in China.

So even as hearts beat fast for gold in the East, the yellow metal continued
to lose its luster in the West. According to Bloomberg's precious metal mining
team, gold ETF holdings have fallen nearly 30 percent since the all-time peak
earlier this year. It's no surprise that the selling has been a big contributor
to the decline in gold prices in 2013.

The good news is that gold ETF redemptions are no longer the main driver of
gold prices. You can see below how the selling out of gold ETFs holdings has
been slowing, but the metal has not followed the same path. Instead, gold has
moved sideways over the past few months, with the price "supported at about
$1,200 to $1,300 an ounce," says Bloomberg. We believe this shift provides
an opportune time to buy, especially with the tremendous physical demand continuing
to emanate from the East.

Earlier this week, The
Wall Street Journal asked several "gold enthusiasts" and me about
our case for gold investing. Reporter Lindsay Gellman highlighted many
of gold's important attributes, including inflation protection and diversification,
and discussed one of the most important points I often make about gold:
Make sure you allocate only 5 to 10 percent of your portfolio to gold and
gold stocks, and have the discipline to take profits.

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Frank Holmes is CEO and chief investment officer of U.S. Global Investors,
Inc., which manages a diversified family of mutual funds and hedge funds specializing
in natural resources, emerging markets and infrastructure.

The company's funds have earned more than two dozen Lipper Fund Awards and
certificates since 2000. The Global Resources Fund (PSPFX) was Lipper's top-performing
global natural resources fund in 2010. In 2009, the World Precious Minerals
Fund (UNWPX) was Lipper's top-performing gold fund, the second time in four
years for that achievement. In addition, both funds received 2007 and 2008
Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a
leading publication for the global resources industry, and he is co-author
of "The Goldwatcher: Demystifying Gold Investing."

He is also an advisor to the International Crisis Group, which works to resolve
global conflict, and the William J. Clinton Foundation on sustainable development
in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator
on financial television. He has been profiled by Fortune, Barron's, The Financial
Times and other publications.

Please consider carefully a fund's investment objectives, risks, charges and
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